Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=228441
Story Retrieval Date: 7/24/2014 8:04:03 AM CST
A common phrase arises when experts discuss what to expect from Ford Motor Co. in 2014: transition year. The Detroit automaker has incurred heavy costs from launching a new line of aluminum F-150 trucks and its big European business has suffered from the economic downturn still plaguing the Continent.
That combination may pull down earnings this year after low borrowing costs and steady gasoline prices contributed to record sales in 2013, a strong year for Ford and the entire auto industry.
James Albertine, an analyst for Stifel Research, used the same terminology in a research note. “2014 is likely to be a transition year as Ford works through older inventory and downtime associated with model changeovers,” he wrote.
Last year, Ford’s annual profit rose 26 percent to $7.16 billion, or $1.76 per share – up 26.3 percent from $5.67 billion, or $1.42 per share in 2012. This was partly due to a 10 percent increase in revenue to $146.9 billion.
“We had an outstanding year in 2013,” CEO Alan Mulally said in Ford’s year-end earnings release. He noted that company strategy for the year “continues to drive solid results and profitable growth for all.”
But, the automaker made cautious predictions for 2014. In December, company executives forecasted an operating profit of $7 billion to $8 billion, which is below the $8.57 billion profit Ford posted in 2013. Ford cited the European segment, which has experienced a 10 percent decrease in auto sales growth the past 3 years. Europe only accounted for around 20 percent of Ford’s vehicle sales in 2012 and 2013, down from about 25 percent in 2011.
Problems in South America also may have caused the careful outlook. The segment, which has accounted for about 8.5 percent of Ford’s vehicle sales in 2013, may not improve in 2014 as political turmoil in countries such as Venezuela and high interest rates in countries such as Brazil have shaken consumer confidence.
“What’s going to happen in South America?” asks Christian Mayes, an Edward Jones analyst in St. Louis. “Right now there is hyperinflation. It’s really a wildcard at this point to see how that’s going to play out this year.”
Earlier last year, rumors swirled that Mulally, 68, was leaving the company to fill the vacant CEO position at Microsoft. However, those fears were erased when Mulally announced he would be staying with Ford through at least the end of 2014.
Mulally is largely considered a top-notch CEO; after leaving Boeing Co. in 2013, he joined Ford, turning the company around and steering it through the financial crisis. Ford is the only one of the “Big Three” auto companies that avoided bankruptcy reorganization– General Motors Co. and the Chrysler Group both filed in 2009.
“Alan has been a very successful executive. The company is making the transition to the next leader but he’s gonna be around this year,” said Matthew Stover, an analyst at Guggenheim Partners. “I think he’s done a great job with the company and he’s very well respected.”
Ford may need to rely on the 23 new vehicles it plans to launch worldwide this year to combat sluggish growth. Stover said Ford’s “workhorse products” are getting older, and Mayes stressed the importance of the launches. “It’s really about coming out with the new products,” Mayes said, a strategy reflected in Ford’s more than doubling of its 11 new model unveilings in 2013.
Another problem Ford may encounter is input costs – aluminum is a more expensive commodity than steel. At a recent Ford presentation, investors also questioned whether the company would be able to overcome these increased costs.
Ford executives assured them the vehicles’ improved capabilities – namely, shedding 700 pounds to improve fuel efficiency – would cover costs by commanding higher prices. They also said retooling the F-Series will require about 13 weeks of total downtime at its truck plants. These weeks of idle trucks may make the initial impact of its innovative new product expensive.
The F-series has been the best-selling vehicles in America for more than 30 years, and if the fever pitch over the unveiling of the new line of trucks earlier this year at the Detroit Auto Show is any indication, initial costs may be worth their weight in the long run.
However, U.S. trucks may face fiercer Asian competition in 2014. Companies such as Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. struggled last year because of a strong yen. But early signs this year point toward a weaker yen and record profits for Japan’s seven leading automakers. Already five of them – Toyota, Suzuki Motor Corp., Mazda Motor Corp., Fuji Heavy Industries and Mitsubishi Motors Corp. – have increased their outlooks for net and operating profit.
The New Year certainly hasn’t gotten off to a fast start. Ford sales have slipped 7.1 percent in January, amidst harsh winter weather. Industrywide, sales declined only 3.1 percent, according to Autodata Corp. Ford will have to have to make a sharp turn to outperform sour forecasts for the rest of the year.